Reliance Steel & Aluminum Co. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results. The filing is for Reliance Steel & Aluminum Co.
Business context and results
Reliance distributes and processes metals across diverse end markets. Management cited relatively stable activity in most markets, but continued weakness in energy and heavy industry; metals prices remained below prior-year levels.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $2,185.2 million | $2,286.2 million | $6,551.8 million | $7,324.3 million |
| Gross profit margin* | 30.0% | 27.9% | 30.2% | 26.8% |
| Operating income | $93.5 million | $101.7 million | $396.4 million | $431.2 million |
| Net income attributable to Reliance | $49.5 million | $51.4 million | $242.6 million | $242.9 million |
| Diluted EPS | $0.68 | $0.69 | $3.32 | $3.21 |
*Company-presented gross margin excludes depreciation and amortization associated with sales. Q3 sales fell 4.4% year over year and nine-month sales fell 10.5%. Lower shipment volumes and selling prices contributed. Same-store tons sold declined 4.0% in Q3 and 2.7% year to date, less than industry shipment declines cited by management. Same-store average selling prices were down 2.3% and 10.0%, respectively. Carbon steel accounted for about 52% of sales and stainless steel 14%.
Cash flow, liquidity and capital
- Operating cash flow: $387.6 million for the nine months, versus $716.3 million in 2015; management also reported $182.4 million for Q3. The year-to-date decline was attributed mainly to working-capital movements and 2015 inventory reduction.
- Cash and working capital: Cash was $143.3 million at September 30, versus $104.3 million at year-end 2015. Inventory was $1.60 billion. Inventory turns based on tons were 4.6 times, compared with 4.4 times in the comparable 2015 period.
- Debt: Total debt was $2.12 billion, up from $1.94 billion at December 31, 2015. Net debt-to-total capital was 32.2%, versus 31.8% at year-end.
- Credit availability: A new five-year, $2.1 billion unsecured credit agreement was entered into September 30, consisting of a $1.5 billion revolver and $600 million term loan. About $1.07 billion remained available on the revolver after borrowings and letters of credit.
- Debt service and covenants: $350 million of 6.20% senior notes matured in November 2016. Management said liquidity was sufficient to meet obligations. At quarter-end, the company reported compliance with covenants: interest coverage of 6.7 times versus a 3.0-times minimum, and leverage of 34.5% versus a 60% maximum.
- Investing and distributions: Investing cash outflow was $458.0 million, including $349.0 million for acquisitions and $110.6 million of capital expenditures. Dividends and equivalents paid were $89.5 million; no shares were repurchased in the nine-month period.
Material changes, outlook and risks
- Gross margin improved despite lower sales, reflecting operational execution, value-added processing and inventory management. Management said margins had exceeded its historical 25%–27% range for six consecutive quarters.
- Operating income fell 8.1% in both the quarter and year-to-date periods. The nine-month decline primarily reflected lower sales; restructuring charges also affected Q3.
- Impairment and restructuring charges totaled $67.3 million in Q3 and year to date, versus $55.5 million in Q3 2015 and $56.3 million for the first nine months of 2015. Charges included $36.4 million for trade names, $13.9 million for property and equipment, $1.4 million for goodwill, and restructuring costs. Management linked impairments chiefly to reduced energy-market demand and lower expected profitability; some charges related to planned location closures or sales.
- Three 2016 acquisitions—Tubular Steel, Best Manufacturing and Alaska Steel—were funded with revolver borrowings and cash. Their purchase-price allocations remained preliminary. Reported acquired-company sales through September included $89.7 million, $9.5 million and $3.9 million, respectively.
- Management cited improving prices for some products during 2016, but said Q3 demand weakened more than anticipated amid declining steel prices and economic and political uncertainty. It expects to focus on working capital and profitability and anticipates continued growth and acquisition activity; the filing provides no specific earnings or revenue guidance.
- Key exposures include metal-price and demand fluctuations, interest rates, foreign exchange and economic conditions. Environmental remediation costs could be significant, but insurance was expected to cover most remaining costs; the company did not expect a material adverse impact. Routine litigation was not expected to have a material adverse effect. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether metal prices and demand—especially in energy and heavy industry—recover, and the effect on sales volumes and margins.
- Whether working-capital needs and operating cash generation remain adequate as inventories and receivables change.
- How the November 2016 note maturity was funded and how debt, interest costs and covenant headroom evolve.
- Whether energy-related impairments, location closures or sales lead to further charges; goodwill and intangible assets totaled approximately $3.0 billion at quarter-end.
- Final purchase-price allocations and subsequent performance of the 2016 acquisitions.